All entrepreneurs start with a great business idea, and then, in order to get the business off the ground, they need an infusion of capital. Yet, startup financing, especially when you are just starting in the business world, can feel much like navigating a minefield. If you take one wrong step, the money is gone, and your business is doomed to fail. Thus, you may want to be clear about what you’re looking for in terms of outside investment, where to look for it, and what you need to get it.
Now, you’ll start with creating a detailed budget for your startup, seeking investors, and doing all the research and preparations to be ready for your meetings with them. But, like it or not, the bad news is that throughout this entire process, there are so many mistakes you can make that can sabotage your startup’s success.
Here are some of the most egregious startup financing mistakes that can sabotage your success and how to avoid them.
Not having clear funding objectives
Every project starts with setting clear goals and objectives to achieve. So, first things first, when setting up your startup, you’ll also start by defining your objectives, including the funding ones.
Now, setting your funding objectives and not being 100% clear about them can be the first mistake that will make you sabotage your success. No matter how obvious this may seem, many companies have missed this step and failed.
So, how do you make sure you get this step right? Milestone fundraising is the way to go. In other words, based on your objectives, figure out step by step how much money you need to get to the next milestone. Consider how much capital every step you need to take to achieve your next milestone will cost, including operational costs and essential professional services.
Overestimating future revenue
Having financial projections is essential to know where you’re heading to with your business. Yet, if your excitement for your business idea interferes with your financial expectations, then you may be making a wrong move.
We get it, a top-down financial forecast can be really inspirational. Yet, let’s be honest, it really is a slippery road of generating unrealistic numbers.
Investors will want to see huge numbers before putting their money on the table. Yet, make sure that you can back up your financial projections with a more substantial and achievable bottom-up forecast. This way, you’ll convince investors that your startup is one of the investment companies worth putting their money in.
Underestimating variable expenses
Creating a detailed budget when designing your business plan is one of the first steps you take. Your budget will include everything from your capital, expenses, financial projections, and financing options. Yet, even a simple task as creating a budget may seem, it has its own traps, including underestimating variable expenses.
Fixed expenses are those that will stay constant, and you can expect to have to pay for them consistently. Yet, when it comes to variable expenses, things get a little bit more complicated. Obviously, there is no way you can definitively account for all variable expenses. However, you can identify the key variables and take them into consideration as an essential factor in your budget calculations.
In other words, you must understand your total costs in order to make sure that you can cover them all.
Making all common mistakes when applying for a loan
Not all entrepreneurs have the initial capital they need to start their own business. Some have to get a small business loan to cover the initial expenses in the process. And, if you are one of those who need to apply for a loan, you may want to avoid these common mistakes, including having an incomplete application and a poor business plan.
Now, the good news is that with traditional banks and increasingly online lenders willing to supply funding, getting a business loan has become easier than ever before, such as less paperwork and a more straight-forward process. Yet, it still requires borrowers to do their homework in preparing their loan application to increase their chances of getting an approval.
First of all, you’ll need to have a complete loan application in terms of tax returns, a business plan, credit score, and bank account records, if the lender requests it. Also, we can’t stress his enough: you’ll need a strong business plan that includes everything from the business concept to goals, primary target market, competitive landscape, executive team, marketing strategy, and projected revenues.
Lenders will want to make sure that your startup can pay back the money you borrow. And, a strong business plan to show that you got it all figured out and you expect your business to find success is the best method to convince them.
Not selling yourself well
Surprising as it may be, investors don’t want to put their money on the table just for the numbers you show to them, but also for you as an entrepreneur who has the potential to help them win even more money. Sure, the numbers you show make it exciting and give them an idea about how much they will get if they invest in your startup.
Yet, with few exceptions, most investors will also expect you to prove that not only your business but also your entrepreneurial skills are worth their money. Investors will look for a good driver who can stay the course and get things done, even when it gets tough.
So, if you want to convince your potential investors that your business idea is worth their money, make sure that you also convince them that you are worth to be given the opportunity to manage their money as well.
Focusing on the money, not on the person who gives them
Sure, you are out here looking for investors and funding to get the money you need to get your business off the ground. Yet, make sure that you avoid the mistake of only focusing on the money and not who writes the check too.
When you are only focusing on the money, you may miss the big red flags that were right in front of you since the beginning. Plus, it will also draw investors away as they will see it as a red flag too.